So far, we've shared half of the picks in our special real money portfolio with our Fools around the world, and we want to continue the fun! (See our previous picks here and here.) Today we're here to bring you the next round of high-conviction stock and fund picks that we believe are well positioned to make money over the next five years.
But first, we wanted to take a minute to share our thoughts with you on one of the most important tools any investor can utilize when building a portfolio -- asset allocation.
What is asset allocation?
As a more technical definition, asset allocation is a strategy where investors divide their portfolio among various asset classes, depending on their risk tolerance, goals, and investing time horizon. Basically, asset allocation is a tool for balancing the potential risks and rewards in a portfolio by investing in different areas of the market.
In practice, for many investors, this means investing in varying amounts in domestic large-, mid-, and small-cap stocks, as well as foreign stocks (both developed and emerging markets), as well as other asset classes such as real estate, cash, bonds, or other alternative investments. The right mix of these investments will be different for each investor, depending on their individual goals and investing temperament.
Why is it important?
Asset allocation helps ensure that investors have an optimal level of risk in their portfolio, given their situation. This is important because if the level of risk is too high, investors run the chance of not being able to meet their financial goals. Additionally, looking at your portfolio through an allocation lens can guide investors to investing opportunities around the globe and ensure that no pockets of growth are ignored.
Asset allocation is a top-down approach to managing a portfolio, and as such, we think it is a good complement to our traditional Foolish approach of bottom-up stock selection. Utilized together, these two methods can build on each other and help craft a more efficient, and successful, portfolio.
What tools can Fools use to help with asset allocation?
Fortunately, we have an entire tool dedicated to tackling the question of portfolio allocation -- Allocator. This tool is available to all of our Premium members and is just one of many specialized tools that are designed to help Fools build their investing knowledge and create a solid, long-term portfolio.
If you are a member of our premium services, you can find the Allocator tool on the Fool Premium home page -- www.fool.com/premium -- under the Tools menu. If you haven't visited the tool yet, we recommend taking a few moments to do so. Be sure to select your Investing House and check out the allocation model portfolios for your chosen House to compare how our models compare to your own portfolio.
Remember, asset allocation is an important tool for building a successful portfolio, so don't leave it to chance!
Now let's get back into the details of our April Fool's Portfolio!
Just as a reminder, here is the allocation plan we are working toward for this portfolio:
- 15 Stocks: 75% of our portfolio (5% each)
- 5 ETFs: 20% of our portfolio (4% each)
- Cash: 5% cash reserved
So whatever you plan to invest to follow along with our April Fool's Portfolio, you would buy up to a 5% position in each stock if following us step by step.
Here's how our recommendations have stacked up so far. If you haven't purchased these yet, we recommend doing so:
- Vanguard Total Stock Market ETF (NYSEMKT:VTI) -- 4%
- Vanguard Total International Stock Market ETF (NASDAQ:VXUS) -- 4%
- Vanguard Small-Cap ETF (NYSEMKT:VB) -- 4%
- Amazon.com (NASDAQ:AMZN) -- 5%
- Etsy (NASDAQ:ETSY) -- 5%
- Pinterest (NYSE:PINS) -- 5%
- Disney (NYSE:DIS) -- 5%
- MercadoLibre (NASDAQ:MELI) -- 5%
- Microsoft (NASDAQ:MSFT) -- 5%
- Paypal (NASDAQ:PYPL) -- 5%
And now let's turn to the next five investments that we're purchasing for our April Fool's Portfolio:
Vanguard Real Estate ETF (NYSEMKT:VNQ)
Portfolio Weighting: 4%
This exchange-traded fund invests in stocks issued by real estate investment trusts, or REITS, which are companies that purchase real property such as office buildings or hotels. We are including this real-estate-focused fund in our portfolio to ensure that we have targeted exposure to this sector, which should play a diversifying role and also help reduce overall volatility.
This fund features a reasonable 0.12% price tag and offers broad diversification across multiple types of REITs, including retail, residential, office, and industrial. Vanguard Real Estate ETF is a quick and easy avenue for investors to boost portfolio diversification while also benefiting from the powerful returns that the real estate sector has historically generated.
Berkshire Hathaway (NYSE:BRK.B)
Portfolio Weighting: 5%
The company that Warren Buffett and Charlie Munger built is no longer just a two-person holding company famous for its public stock holdings. With a market capitalization of $625 billion, Berkshire is one of the largest companies around, employing hundreds of thousands of people. It operates a massive insurance business (including GEICO), owns 100% of the largest U.S. railroad by freight in BNSF Railway, runs Berkshire Energy, a group of utility and energy companies, and also a bunch of other smaller businesses in a wide array of industries. Then throw in its 5%-plus holding of Apple (worth $118 billion) plus a collection of other public companies, and Berkshire gives us a wide view of American commerce.
While Buffett's investment acumen hasn't shined during the past few years as technology has moved to the forefront, Berkshire is, and will be, more than the Oracle of Omaha over the next five to 10 years (he is now a nonagenarian after all). That poses a risk but we believe he has plenty of bench strength to support what is a wide diversified conglomerate of very solid businesses. And the stock should give us some diversification and likely outperform when the market struggles. We like that comfort, and you can, too.
Intuitive Surgical (NASDAQ:ISRG)
Portfolio Weighting: 5%
The complexities around surgery are immense. Since 1995 Intuitive Surgical has been helping doctors perform better surgical procedures with its da Vinci robotic surgical system. In fact, da Vinci was one of the first robotic-assisted, minimally invasive surgical systems cleared by the FDA. It provides an ergonomic console for surgeons to operate using a 3D high-def image. It is all designed to provide more precise, safer, and better procedures. Since Intuitive started, it has contributed to more than 8.5 million procedures across 67 countries. And the future remains bright as the company expands its offerings to serve different procedures and enhances its system with cloud and mobile tie-ins.
While COVID-19 lockdowns slowed procedures in 2020, Intuitive is seeing a healthy rebound in both procedures and surgical replacements. The U.S. and China were signs of strength in the first quarter of 2021. Europe not as much. Looking ahead, more procedures should return to pre-pandemic levels and Intuitive's business can continue to do well. It has a rock-solid balance sheet and healthy margins that come from selling high-priced robotic systems and very profitable consumables and follow-on services. And more and more doctors are training on robotics first. Intuitive is a combination tech and healthcare company to consider for your portfolio that has been a fabulous winner over the last decade. Its winning days are far from over.
Portfolio Weighting: 5%
Whereas Intuitive Surgical is using technology to make things safer, ServiceNow uses technology to make things easier. And like Intuitive, ServiceNow's business has thrived over the last few years, propelling the company to a market capitalization of more than $107 billion. Its 13,000 employees envision, develop, sell, and integrate applications that automate and create digital systems to improve workflows for nearly 7,000 global clients, including 80% of the Fortune 500.
The trend toward automation and business processing has been long-going, but 2020 accelerated that digital movement. Businesses large and small figured out quickly that they needed to automate as much routine as possible to scale and grow. That trend has been the friend of ServiceNow and the company has taken advantage. Renewal rates for its services (led by its core Now Platform) topped 99% recently. Growth rates exceed 30% and more than $0.30 of each dollar in sales ends up as free cash flow (even with hefty investments into R&D).
Workflow improvement and automation will only be in more demand over the next five to 10 years and we expect ServiceNow to be a continued leader. And that should serve its clients, and shareholders, very well too.
Portfolio Weighting: 5%
As one of the most recognized consumer brands in the world, Starbucks might receive a portion of your disposable income once a week (or more) if you favor a chai latte, cappuccino, or a cold brew. Here's a chance to get a little back other than just a tasty beverage or savory snack.
Starbucks operates nearly 33,000 stores across the globe, dishing up everything from avocado boxes to Yukon brand coffee. The company's investments in technology have been as important as its investments in food, though. Mobile ordering now makes up around a quarter of sales as COVID-19 escalated the push to mobile-first (if not mobile-only) ordering. Average ticket size has been increasing partly because of the mobile-first strategy the company has been emphasizing. Strong partnerships with Nestle and Pepsi have driven a robust packaged and non-Starbucks-store business that now makes Starbucks the No. 1 brand in coffee across all choices.
We think Starbucks is more than just a COVID-19 rebound investment. While the stock won't double over a year like it did since the lows of March 2020, it should produce decent returns for you over the next five years (and importantly make you money). That includes a little dividend you can choose to reinvest or use to add to your Starbucks card for that next Frappuccino.
Fools, we are entering the final stretch of our month-long focus on our special April Fool's Portfolio.
We've still got more investing guidance coming your way, so stay tuned. And if you haven't purchased all of our recommendations yet (or if you've only bought some of them), you've still got time to get caught up. We want you to own our complete portfolio, so make sure you pick up each investment.
Be sure to check back here next week on Friday, April 30, for our final update and the reveal of our last five Foolish investments!
Please note, the Allocator tool is not personalized guidance (we are not an investment advisor and cannot offer personalized financial advice), but rather a framework you can use when reviewing your current portfolio. Every portfolio is different. Houses offer model portfolios based on user inputs for risk tolerance and time horizon to understand different ways a portfolio can be constructed, and these inputs can be changed at any time to see other models. Please see our Tools Terms of Service.